<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   -----------

                                  FORM 10-Q/A-1

              /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OR

              / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 1998       Commission file number 0-20526

                                   -----------

                             ARCADIA FINANCIAL LTD.
             (Exact name of registrant as specified in its charter)

            MINNESOTA                                 41-1664848
  (State or other jurisdiction               (I.R.S. Employer Identification
Of incorporation or organization)                       Number)

            7825 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MN 55439-2435
               (Address of principal executive offices)    (Zip Code)

        Registrant's telephone number, including area code (612) 942-9880

                                   -----------


      Indicate by checkmark whether the Registrant (1) has filed all reports 
required to be filed by section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
Registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days. Yes  X   No
                                                   ---     ---

      The number of shares of the Common Stock of the registrant outstanding 
as of October 30, 1998 was 39,166,813.

<PAGE>

      The undersigned registrant hereby amends its Quarterly Report on From 
10-Q for the quarter ended September 30, 1998 to amend Items 1 and 2 of Part 
I in their entirety. Such amendments reflect a restatement of the Company's 
consolidated balance sheets and related consolidated statements of operations 
and comprehensive income, shareholders' equity and cash flows resulting from 
a change in account policy with respect to the valuation and accounting for 
the Company's finance income receivable. Refer to Note 2 to the Unaudited 
Consolidated Financial Statements for additional information.


                               FORM 10-Q/A-1 INDEX

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
PART I   FINANCIAL INFORMATION                                                
Item 1.  Consolidated Financial Statements                                    3
Item 2.  Results of Management's Discussion and Analysis of         
           Financial Condition and Operations                                12

SIGNATURES                                                                   25
</TABLE>

      The financial information for the interim periods presented herein is 
unaudited. In the opinion of management, all adjustments necessary (which are 
of a normal recurring nature) have been included for a fair presentation of 
the results of operations. The results of operations for an interim period 
are not necessarily indicative of the results that may be expected for a full 
year or any other interim period.

                         SAFE HARBOR STATEMENT UNDER THE
                PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

      Certain statements under the caption "Management's Discussion and 
Analysis of Financial Condition and Results of Operations" and elsewhere in 
this Form 10-Q constitute "forward-looking statements" within the meaning of 
the Private Securities Litigation Reform Act of 1995. Such forward-looking 
statements may be identified by the use of terminology such as "may," "will," 
"expect," "anticipate," "estimate," "should," or "continue" or the negative 
thereof or other variations thereon or comparable terminology. Such 
forward-looking statements are subject to certain risks and uncertainties 
that could cause actual results to differ materially from historical results 
or from those results presently anticipated or projected. Such factors 
include, among other things, the following: delinquency and loan loss rates 
which vary from assumptions; modifications to the Company's repossession 
disposition program; accounting and regulatory changes; interest rate 
fluctuations; difficulties or delays in the securitization of automobile 
loans; availability of adequate short- and long-term financing; general 
economic and business conditions; and other matters set forth under the 
caption "Cautionary Statements" in exhibit 99.1 to the Company's June 30, 
1998, Quarterly Report on Form 10-Q filed August 8, 1998.


                                     2
<PAGE>

                             ARCADIA FINANCIAL LTD.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    (RESTATED)
                                                                    (UNAUDITED)         (RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE  AND PER SHARE AMOUNTS)     SEPTEMBER 30, 1998   DECEMBER 31, 1997
                                                                ------------------   -----------------
<S>                                                             <C>                  <C>
                                     ASSETS

Cash and cash equivalents                                               $   6,328           $  17,274  
Due from securitization trust                                              98,384             107,207  
Auto loans held for sale                                                   20,045              49,133  
Finance income receivable                                                 592,951             602,454  
Furniture, fixtures and equipment                                          17,140              17,371  
Other assets                                                               30,328              32,483  
                                                                     ------------        ------------
     Total assets                                                       $ 765,176           $ 825,922  
                                                                     ------------        ------------
                                                                     ------------        ------------
                                                                                                       
                      LIABILITIES AND SHAREHOLDERS' EQUITY                                             
                                                                                                       
Amounts due under warehouse facilities                                  $  57,843           $  30,880  
Senior notes                                                              366,403             365,640  
Subordinated notes                                                         48,902              50,772  
Capital lease obligations                                                   3,735               5,368  
Deferred income taxes                                                           -              11,506  
Accounts payable and accrued liabilities                                   25,718              26,302  
                                                                     ------------        ------------
     Total liabilities                                                    502,601             490,468  
                                                                                                       
Commitments and contingencies                                                                          
                                                                                                       
Shareholders' equity:                                                                                  
Capital stock, $.01 par value, 100,000,000 shares authorized:                                        
    Common stock 39,166,813 and 38,813,735 shares issued                                               
    and outstanding, respectively                                             392                 388  
Additional paid-in capital                                                325,143             322,819  
Accumulated other comprehensive income                                     16,711               3,704  
Retained earnings (deficit)                                               (79,671)              8,543  
                                                                     ------------        ------------
     Total shareholders' equity                                           262,575             335,454  
                                                                     ------------        ------------
     Total liabilities and shareholders' equity                         $ 765,176           $ 825,922  
                                                                     ------------        ------------
                                                                     ------------        ------------
</TABLE>

        See notes to unaudited consolidated financial statements.


                                     3
<PAGE>

                             ARCADIA FINANCIAL LTD.
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         (RESTATED)                          (RESTATED)
                                                                     THREE MONTHS ENDED                  NINE MONTHS ENDED
                                                                        SEPTEMBER 30,                       SEPTEMBER 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                    1998             1997              1998               1997
                                                               ------------      ------------      ------------       ------------
<S>                                                            <C>               <C>               <C>                <C>
REVENUES:
 Net interest margin                                           $     22,675      $     21,179      $     63,593       $     60,058
 Gain (loss) on sale of loans                                        20,667            23,954           (39,631)           (36,205)
 Servicing fee income                                                21,236            17,748            61,086             47,761
                                                               ------------      ------------      ------------       ------------
   Total revenues                                                    64,578            62,881            85,048             71,614

EXPENSES:
 Salaries and benefits                                               15,658            16,230            48,778             45,823
 General and administrative and other operating expenses             27,695            24,471            95,100             74,446
                                                               ------------      ------------      ------------       ------------
   Total operating expenses                                          43,353            40,701           143,878            120,269
 Long-term debt and other interest expense                           12,926            10,400            38,619             28,642
                                                               ------------      ------------      ------------       ------------
   Total expenses                                                    56,279            51,101           182,497            148,911
                                                               ------------      ------------      ------------       ------------
 Operating income (loss) before income taxes and
   extraordinary item                                                 8,299            11,780           (97,449)           (77,297)
 Income tax expense (benefit)                                             -             4,476            (9,235)           (29,374)
                                                               ------------      ------------      ------------       ------------
 Income (loss) before extraordinary item                              8,299             7,304           (88,214)           (47,923)
 Extraordinary item, net of tax                                           -                 -                 -            (15,828)
                                                               ------------      ------------      ------------       ------------
   Net income (loss)                                                  8,299             7,304           (88,214)           (63,751)

Other comprehensive income (loss):
 Net unrealized gain (loss) on finance income receivables             7,631             2,565            10,736              4,322
 Income tax provision (benefit) related to other                          -               974            (2,271)             1,643
   comprehensive income
                                                               ------------      ------------      ------------       ------------
                                                                      7,631             1,591            13,007              2,679
                                                               ------------      ------------      ------------       ------------
 COMPREHENSIVE INCOME (LOSS)                                   $     15,930      $      8,895      $    (75,207)      $    (61,072)
                                                               ------------      ------------      ------------       ------------
                                                               ------------      ------------      ------------       ------------
BASIC EARNINGS PER SHARE:
 Net income (loss) per share before extrordinary item          $       0.21      $       0.19      $      (2.26)      $      (1.24)
 Extraordinary item per share                                             -                 -                 -              (0.41)
                                                               ------------      ------------      ------------       ------------
   Net income (loss) per share                                 $       0.21      $       0.19      $      (2.26)      $      (1.65)
                                                               ------------      ------------      ------------       ------------
                                                               ------------      ------------      ------------       ------------
DILUTED EARNINGS PER SHARE:
 Net income (loss) per share before extraordinary item         $       0.21      $       0.19      $      (2.26)      $      (1.24)
 Extraordinary item per share                                             -                 -                 -              (0.41)
                                                               ------------      ------------      ------------       ------------
   Net income (loss) per share                                 $       0.21      $       0.19      $      (2.26)      $      (1.65)
                                                               ------------      ------------      ------------       ------------
                                                               ------------      ------------      ------------       ------------
Weighted average shares outstanding:
   Basic                                                         39,142,050        38,740,078        39,031,668         38,615,060
   Diluted                                                       39,279,813        39,231,962        39,031,668         38,615,060
</TABLE>

        See notes to unaudited consolidated financial statements.


                                     4
<PAGE>

                             ARCADIA FINANCIAL LTD.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  UNAUDITED)
<TABLE>
<CAPTION>
                                                                                        (RESTATED)
                                                                                    NINE MONTHS ENDED
                                                                                       SEPTEMBER 30,
                                                                              ------------------------------
(DOLLARS IN THOUSANDS)                                                            1998               1997
                                                                              -----------        -----------
<S>                                                                           <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                             $   (88,214)       $   (63,751)
Adjustments to reconcile net income to net cash used in
 operating activities: 
 Depreciation and amortization                                                      8,044              5,163
 (Increase) decrease in assets:
    Automobile loans held for sale:
      Purchases of automobile loans                                            (1,731,546)        (2,323,464)
      Sales of automobile loans                                                 1,714,710          2,276,335
      Repayments of automobile loans                                               45,925             27,784
    Finance income receivable                                                      22,510            (76,035)
    Due from securitization trusts                                                  8,823             27,646
    Other assets                                                                      340              4,074
 Increase (decrease) in liabilities:
    Deferred income taxes                                                         (11,506)           (37,430)
    Accounts payable and accrued liabilities                                         (584)             3,303
                                                                              -----------        -----------

      Total cash used in operating activities                                     (31,498)          (156,375)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of furniture, fixtures and equipment                                  (4,704)            (7,064)
Collections on subordinated certificates                                              758              1,187
                                                                              -----------        -----------
      Total cash used in investing activities                                      (3,946)            (5,877)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock                                          1,038              2,976
Proceeds from borrowings under warehouse facilities                             2,067,182          2,559,245
Repayment of borrowings under warehouse facilities                             (2,040,219)        (2,544,122)
Unsecured subordinated notes, net                                                  (1,870)            (2,395)
Repayments of long-term debt                                                            -           (145,000)
Proceeds from issuance of long term debt                                                -            300,000
Deferred debt issuance cost                                                             -             (4,870)
Reduction of capital lease obligations                                             (1,633)            (1,919)
                                                                              -----------        -----------

      Total cash provided by financing activities                                  24,498            163,915

Net increase (decrease) in cash and cash equivalents                              (10,946)             1,663
Cash and cash equivalents at beginning of period                                   17,274             16,057
                                                                              -----------        -----------
Cash and cash equivalents at end of period                                    $     6,328        $    17,720
                                                                              -----------        -----------
                                                                              -----------        -----------
Supplemental disclosures of cash flow information: 
  Non cash activities:
    Additions to capital leases                                                         -        $       132
  Cash paid for:
    Interest                                                                  $    55,233        $    36,669
</TABLE>

        See notes to unaudited consolidated financial statements.


                                     5
<PAGE>

                             ARCADIA FINANCIAL LTD.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                                                                                                          ACCUMULATED
                                                     NUMBER OF     COMMON       ADDITIONAL     RETAINED       OTHER
                                                      COMMON         PAR         PAID IN       EARNINGS   COMPREHENSIVE
                                                      SHARES        VALUE        CAPITAL       (DEFICIT)      INCOME        TOTAL
                                                    ----------    ----------    ----------    ----------    ----------   ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S>                                                 <C>           <C>           <C>           <C>           <C>          <C>
BALANCE, DECEMBER 31, 1997, AS RESTATED             38,813,735         $ 388    $  322,819    $    8,543    $    3,704   $  335,454
Exercise of options and warrants                       149,323             2           539             -             -          541
Issuance of Common Stock:                                                    
  Benefit plans                                        203,755             2           495             -             -          497
Amortization of deferred compensation                        -             -         1,290             -             -        1,290
Unrealized gain on financed income receivable                -             -             -             -        13,007       13,007
Net loss, as restated                                        -             -             -       (88,214)            -      (88,214)
                                                    ----------    ----------    ----------    ----------    ----------   ----------
BALANCE, SEPTEMBER 30, 1998, AS RESTATED            39,166,813         $ 392    $  325,143    $ (79,671)    $   16,711   $  262,575
                                                    ----------    ----------    ----------    ----------    ----------   ----------
                                                    ----------    ----------    ----------    ----------    ----------   ----------
</TABLE>

        See notes to unaudited consolidated financial statements.


                                     6
<PAGE>

                             ARCADIA FINANCIAL LTD.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE QUARTER ENDED SEPTEMBER 30, 1998


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BASIS OF PRESENTATION. The interim financial statements have been 
prepared by the Company pursuant to the rules and regulations of the 
Securities and Exchange Commission applicable to quarterly reports on Form 
10-Q. Certain information and footnote disclosures normally included in 
financial statements prepared in accordance with generally accepted 
accounting principles have been condensed or omitted pursuant to such rules 
and regulations, although management believes that the disclosures present 
fairly the financial position of the Company and its subsidiaries for the 
periods presented. These financial statements should be read in conjunction 
with the audited consolidated financial statements and related notes and 
schedules included in the Company's 1997 Annual Report on Form 10-K/A filed 
March 30, 1998.

      The consolidated financial statements include the accounts of the 
Company and its wholly-owned subsidiaries. All significant intercompany 
accounts and transactions have been eliminated.

      Certain reclassifications have been made to the September 30, 1997 
balances to conform to current period presentation.

      USE OF ESTIMATES

      In conformity with generally accepted accounting principles, management 
utilizes assumptions and estimates that affect the reported value of finance 
income receivable and the gain on sale of automobile receivables. Such 
assumptions include, but are not limited to, estimates of loan prepayments, 
defaults, recovery rates and present value discount. The Company uses a 
combination of its own historical experience, industry statistics and 
expectation of future performance to determine such estimates. The Company's 
estimation process is evaluated on a regular basis and modified when deemed 
necessary. Modifications to the estimation process may result in changes in 
estimates utilized to determine the carrying value of finance income 
receivable. Actual results may differ from the Company's estimates due to 
numerous factors both within and beyond the control of Company management. 
Changes in these factors could require the Company to revise its assumptions 
concerning the amount of voluntary prepayments, the frequency and/or severity 
of defaults and the recovery rates associated with the disposition of 
repossessed vehicles. The range of assumptions, as well as actual 
performance, are reflective of the risk characteristics of the loans within 
specific securitization pools.

      The Company adopted Statement of Financial Accounting Standards No. 
130, "Reporting Comprehensive Income" ("SFAS 130"), effective January 1, 
1998. SFAS 130 establishes standard for reporting comprehensive income and 
its components in a full set of financial statements. The new standard 
requires that all items that are required to be recognized under accounting 
standards as components of comprehensive income, including an amount 
representing total comprehensive income, be reported in a financial statement 
that is displayed with the same prominence as other financial statements. 
Pursuant to SFAS 130, the Company has reported comprehensive income in the 
accompanying consolidated financial statements. Prior year financial 
statements have been reclassified to conform to the requirements of SFAS 130.


                                     7
<PAGE>

2.  ACCOUNTING CHANGE

      Pursuant to the FASB's Special Report, "A Guide to Implementation of 
Statement 125 on Accounting for Transfers and Servicing of Financial Assets 
and Extinguishments of Liabilities, Second Edition," dated December 1998, and 
public comments from the Securities and Exchange Commission released on 
December 8, 1998, during the fourth quarter of 1998 the Company changed its 
accounting policy with respect to the valuation and accounting for its 
finance income receivable to the "cash-out" method. Finance income receivable 
represents the Company's retained interest in estimated future cash flows 
from securitization transactions. Under the "cash-in" method previously used 
by the Company, (i) the assumed discount period for measuring the present 
value of future cash flows ended when these cash flows were deposited into 
the securitization trust accounts and (ii) any initial deposits to spread 
accounts were recorded at face value. Under the "cash-out" method, the 
assumed discount period for measuring the present value of future cash flows 
from the trusts ends when cash, including return of the initial deposits, its 
distributed to the Company on an unrestricted basis. Prior period financial 
statements have been restated to reflect this change on a retroactive basis. 
The effects of the restatement on the consolidated balance sheet at December 
31, 1997 and the consolidated statements of operations and comprehensive 
income and shareholders' equity for the three months ended September 30, 1998 
and 1997 are as follows:

<TABLE>
<CAPTION>
                                               AT SEPTEMBER 30, 1998                  AT DECEMBER 31, 1997
                                           -----------------------------          ------------------------------
                                           ORIGINALLY              AS             ORIGINALLY              AS
(IN MILLIONS, EXCEPT PER SHARE DATA)        REPORTED            RESTATED           REPORTED            RESTATED
                                           ----------         ----------          ----------          ----------
<S>                                        <C>                <C>                 <C>                 <C>
BALANCE SHEET:
 Finance income receivable                 $  598,221         $  592,951          $  622,282           $  602,454
 Deferred income taxes                              -                  -              18,846               11,506
 Shareholders' equity                         267,845            262,575             347,942              335,454
</TABLE>

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED SEPTEMBER 30,
                                           ---------------------------------------------------------------------
                                                        1998                                   1997
                                           -----------------------------          ------------------------------
                                           ORIGINALLY              AS             ORIGINALLY              AS
                                            REPORTED            RESTATED           REPORTED            RESTATED
                                           ----------         ----------          ----------          ----------
<S>                                        <C>                <C>                 <C>                 <C>
STATEMENT OF OPERATIONS:
 Revenues                                  $   63,574         $   64,578          $   63,664          $   62,881
 Income tax expense (benefit)                -                         -               4,774               4,476
 Net Income (loss)                              7,295              8,299               7,789               7,304

 Basic earnings per share                  $     0.19         $     0.21          $     0.20          $     0.19
 Diluted Earnings per share                      0.19               0.21                0.20                0.19
</TABLE>


                                     8
<PAGE>

                             ARCADIA FINANCIAL LTD.
        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    FOR THE QUARTER ENDED SEPTEMBER 30, 1998

3.  FINANCE INCOME RECEIVABLE

     The following table sets forth the components of finance income receivable:

<TABLE>
<CAPTION>
                                                                                            (RESTATED)         (RESTATED)
                                                                                                AT                 AT
                                                                                          SEPTEMBER 30,       DECEMBER 31,
                                                                                               1998               1997
                                                                                        ----------------    -----------------
(DOLLARS IN THOUSANDS)
<S>                                                                                       <C>                 <C>
Estimated cash flows on loans sold, net of estimated prepayments                          $   1,200,187       $   1,009,800  
Deferred servicing income                                                                      (103,515)            (88,282) 
Reserve for loan losses                                                                        (413,112)           (235,599) 
                                                                                        ----------------    -----------------
Undiscounted cash flows on loans sold, net of estimated prepayments                             683,560             685,919  
Discount to present value                                                                       (90,609)            (83,465) 
                                                                                        ----------------    -----------------
                                                                                          $     592,951       $     602,454  
                                                                                        ----------------    -----------------
                                                                                        ----------------    -----------------


Reserve for loan losses as a percentage of servicing portfolio                                     8.04%               4.75% 
</TABLE>

     The following represents the roll-forward of the finance income receivable
balance:

<TABLE>
<CAPTION>

(DOLLARS IN THOUSANDS)
<S>                                                                                                           <C>
BALANCE, DECEMBER 31, 1997, AS RESTATED                                                                       $   602,454 
Present value of estimated future cash flows from current period securitizations                                  175,669 
Interest earned on spread accounts                                                                                 10,695 
Recognition of present value effect of discounted cash flows                                                       36,493 
Unrealized gain on retained assets                                                                                 10,736 
Less:                                                                                                                    
  Spread account recourse reduction amount (1)                                                                    (25,000)
  Excess cash flows released to the Company (2)                                                                  (103,596)
  Change in estimates of charge-offs, recovery rates and prepayments                                             (114,500)
                                                                                                           ----------------
BALANCE, SEPTEMBER 30, 1998, AS RESTATED                                                                      $   592,951 
                                                                                                           ----------------
                                                                                                           ----------------
</TABLE>

------------------------
(1)   In May 1998, the Company and its provider of asset-backed securities
      insurance entered into an arrangement whereby the Company was allowed to
      receive $25 million of cash from certain spread accounts sooner than it
      would have absent such arrangement. The arrangement may be extended on an
      annual basis upon mutual arrangement by and between the Company and its
      provider of asset-backed securities insurance. The Company pays a monthly
      fee to its provider of asset-backed securities insurance to maintain the
      arrangement. The $25 million will be replenished in the relevant spread
      accounts by means of a $3 million reduction in the level of monthly cash
      releases from the spread accounts. The replishment period will begin in
      May 1999, unless the terms of the arrangement are extended.

(2)   Includes $0.6 million that has been restricted pursuant to an arrangement
      between the Company and its provider of asset-backed securities insurance.
      Such arrangement provides that, if any insured securitization trust
      exceeds the specified portfolio performance test as defined within the
      trust agreement, the Company may, in lieu of retaining excess cash from
      that securitization trust in the related spread accounts, pledge an
      equivalent amount of cash, which has the effect of preventing the
      violation of the portfolio performance test. Such pledged amounts are
      included in cash and cash equivalents. Restrictions on the pledged amounts
      may be lifted if the portfolio performance tests are met and maintained
      for the related securitization trusts as defined in the arrangement, the
      violations are waived, or the loans within the securitization trust are
      repurchased by the Company.


                                     9
<PAGE>

                             ARCADIA FINANCIAL LTD.
        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    FOR THE QUARTER ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>

4.  OTHER ASSETS                                                     AT                    AT
                                                                SEPTEMBER 30,          DECEMBER 31,
                                                                    1998                  1997
                                                                -------------         -------------
    (DOLLARS IN THOUSANDS)  
<S>                                                             <C>                   <C>
    Advances due to servicer                                          $ 5,464               $ 6,072 
    Deferred debt issuance costs                                       10,462                11,518 
    Investment in subordinated certificates                             2,106                 2,864 
    Servicing fee receivable                                            4,846                 4,389 
    Prepaid expenses                                                    1,532                 1,078 
    Repossessed assets                                                    132                 1,181 
    Other assets                                                        5,786                 5,381 
                                                                -------------         -------------
                                                                      $30,328               $32,483 
                                                                -------------         -------------
                                                                -------------         -------------

<CAPTION>

5.   SUBORDINATED NOTES                                              AT                    AT
                                                                SEPTEMBER 30,          DECEMBER 31,
                                                                    1998                  1997
                                                                -------------         -------------
     (DOLLARS IN THOUSANDS)
<S>                                                             <C>                   <C>
     Senior subordinated notes, Series 1996-A                         $30,000               $30,000 
     Junior subordinated notes                                         18,902                20,772 
                                                                -------------         -------------
                                                                      $48,902               $50,772 
                                                                -------------         -------------
                                                                -------------         -------------
</TABLE>


                                     10
<PAGE>

                             ARCADIA FINANCIAL LTD.
        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                    FOR THE QUARTER ENDED SEPTEMBER 30, 1998

6.  EARNINGS PER SHARE

    The following table sets forth the computation of basic and diluted earnings
    per share for each of the three and nine month periods ended September 30:

<TABLE>
<CAPTION>
                                                                     (RESTATED)                            (RESTATED)
                                                                THREE MONTHS ENDED                     NINE MONTHS ENDED
                                                                    SEPTEMBER 30,                         SEPTEMBER 30,
    (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)               1998               1997               1998                1997
                                                           ------------       ------------       ------------        ------------
    <S>                                                    <C>                <C>                <C>                 <C>
     Numerator:
       Net income (loss ) before
         extraordinary item                                $      8,299       $      7,304       $    (88,214)       $    (63,751)
                                                           ------------       ------------       ------------        ------------
                                                           ------------       ------------       ------------        ------------
     Denominator:
       Denominator for basic earnings per
         share - weighted average shares                     39,142,050         38,740,078         39,031,668          38,615,060
       Dilutive effect of options and warrants (1)              137,763            491,884                  -                   -
                                                           ------------       ------------       ------------        ------------
       Denominator for diluted earnings per
         share - adjusted weighted average
         shares                                              39,279,813         39,231,962         39,031,668          38,615,060
                                                           ------------       ------------       ------------        ------------
                                                           ------------       ------------       ------------        ------------

     Basic earnings (loss) per share before
       extraordinary item                                  $       0.21       $       0.19       $      (2.26)       $      (1.24)
                                                           ------------       ------------       ------------        ------------
                                                           ------------       ------------       ------------        ------------
     Diluted earnings (loss) per share before
       extraordinary item                                  $       0.21       $       0.19       $      (2.26)       $      (1.24)
                                                           ------------       ------------       ------------        ------------
                                                           ------------       ------------       ------------        ------------
</TABLE>

------------------------
(1) For the nine months ended September 30, 1998 and 1997, the weighted average
shares under the diluted computation have an anti-dilutive effect; therefore
diluted earnings per share are shown equal to basic earnings per share.


                                       11
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

      Substantially all of the Company's revenues are derived from the 
purchase, securitization and servicing of consumer automobile loans 
originated in 45 states primarily by car dealers affiliated with major 
foreign and domestic manufacturers. Loans are purchased through 18 regional 
buying centers (or "hubs") located in 15 states, supplemented by a network of 
dealer development representatives ("DDRs") which develop and maintain 
relationships with car dealers operating within each "hub's" immediate market 
area or in surrounding market areas referred to as "spokes." Credit approval 
and loan processing are generally performed at the "hub" or at the Company's 
headquarters in Minneapolis, Minnesota. The Company acts as the servicer of 
all loans originated and securitized by it in return for a monthly servicing 
fee. To perform its servicing responsibilities the Company operates a 
national customer service center in Minneapolis, Minnesota and four regional 
collection centers located in Charlotte, North Carolina; Dallas, Texas; 
Denver, Colorado; and Minneapolis, Minnesota.

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

RESULTS OF OPERATIONS

      CHANGES IN ACCOUNTING ESTIMATES AND NON-RECURRING CHARGES

      Included in the Company's financial results for the nine months ended 
September 30, 1998, are two non-cash charges totaling $125 million. The 
non-cash charges include a pre-tax $114.5 million charge to gain on sale of 
loans associated with a change in accounting estimates to reflect (i) a 
higher estimate of the frequency of defaulted receivables (ii) a reduction in 
assumed loan loss recovery rates, (iii) a reduction in estimated voluntary 
loan prepayments, and (iv) additions to general reserves applicable to 
unanticipated changes in the future performance of the existing portfolio of 
receivables. An additional $10.5 million pre-tax charge relates to the 
elimination of the Company's retail remarketing program and other 
organizational changes designed to improve future operating efficiencies.

      Historically, management's estimate of the frequency of loan defaults 
was based on actual credit performance incurred to date segregated by each 
securitization transaction and loan product (Premier and Classic) as well as 
comparisons to externally-generated industry information when available. In 
response to a perception of increased risk within the consumer finance 
industry and the Company's dependence on internal historical experience as an 
indicator of future credit performance, management commenced a project to 
identify what it hoped would be a more predictive alternative to estimating 
future performance of its servicing portfolio to not only improve the 
Company's assessment of its finance income receivable carrying amount but 
also to enhance the Company's pricing of its loan products. This project 
focused on identifying correlations between the credit performance of the 
loans in the Company's servicing portfolio and the credit characteristics of 
each contract at the time of origination, including externally-developed 
credit score, loan-to-value ratio, debt-to-income ratio and payment-to-income 
ratio. The Company's decision to obtain and utilize a credit score from a 
nationally recognized independent credit scoring company rather than 
utilizing its own internally-developed credit score was based on its desire 
to reduce the subjectivity of the analysis. As a result of this project, 
management determined that the combination of externally-developed credit 
score and loan-to-value ratio was most predictive of future loan performance. 
Using the information derived from this process, management was then able to 
segregate the loans in its servicing portfolio into eight distinct tranches 
of credit performance that management believes provide a higher level of 
precision in estimating future default experience than its previous 
methodology. As a result, management determined in June 1998 that it was 
necessary to revise its estimate with respect to the frequency of future loan 
defaults and reduce the carrying value of its finance income receivable by 
approximately $67 million.


                                       12
<PAGE>

      In addition to the frequency of loan defaults, the valuation of the 
Company's finance income receivable is based in part on an estimate of the 
recovery upon the disposition of repossessed vehicles. Although the Company 
was reserved for and realized recovery rates slightly above 50% on the sale 
of repossessed vehicles during the first six months of 1998, management 
believes that market pressure on used car prices will force future recovery 
rates downward and therefore, believes that it was appropriate to lower the 
estimated recovery rate to 45%. This decrease to the Company's estimated 
recovery rate, taking into consideration the increase in the estimated 
frequency of defaults discussed above, led to a further reduction in the 
carrying value of finance income receivable at June 30, 1998, of 
approximately $51 million.

      A third component in the valuation of finance income receivable is an 
estimate of the amount and timing of voluntary prepayments of loans. 
Historically, management has estimated the percentage of receivables it 
expects to prepay on a monthly basis and has assumed that such monthly 
prepayment speed would remain constant throughout the life of the 
securitization trust. A detailed analysis of the Company's actual prepayment 
data indicated, however, that for an extended period of time prepayment 
speeds have performed slower than expected and have progressively declined as 
a securitization trust ages. As a result, management determined that it was 
appropriate to reduce its prepayment speed assumption, which resulted in an 
increase to its finance income receivable carrying value at June 30, 1998, of 
approximately $49 million.

      Finally, to provide for current uncertainties related to the consumer 
finance industry and the remaining subjectivity of the estimates used in 
valuing the finance income receivable, management believes that it was 
appropriate to increase its finance income receivable reserves at June 30, 
1998, by an additional $45.5 million.

        Also during the second quarter of 1998, the Company decided to
discontinue its retail remarketing operations and finalized plans aimed at
reducing infrastructure costs and improving operating efficiencies. After a
detailed review during 1997 and first half of 1998 the Company determined that
its retail remarketing operation which was responsible for the liquidation of
repossessed vehicles through retail consignment lots did not provide an adequate
risk-adjusted return commensurate with the attention necessary by management to
operate such strategy and therefore decided to cease such operations. Also
during this time period, the Company conducted an exhaustive study of
substantially all Company functions and developed a plan which includes further
consolidation of the Company's servicing and collection operations into its four
regional collection centers and streamlining of other operating procedures. As a
result, the Company recognized a $10.5 million pre-tax charge through other
operating expenses during the second quarter of 1998 associated with estimated
severance and benefit costs, termination or subleasing of certain lease
commitments, and legal expenses associated with the operational changes.

      Included in the Company's financial results during the nine month period
ended June 30, 1997, are two special charges taken in March 1997. These charges
included a non-cash pre-tax charge of approximately $103 million, due primarily
to a change in accounting estimate related to the assumed recovery rates on
repossessed vehicles and modifications to the Company's retail disposition
strategy, and an extraordinary charge of approximately $15.8 million, net of
tax, due to the early extinguishment of the Company's 13% Senior Term Notes, due
2000 (the "13% Notes").


                                       13
<PAGE>

      NET INTEREST MARGIN.  The components of net interest margin for each of
the three and nine months ended September 30 were:

<TABLE>
<CAPTION>

                                                                 (RESTATED)                   (RESTATED)
                                                             THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                SEPTEMBER 30,               SEPTEMBER 30,
                                                         --------------------------   ---------------------------
                                                             1998          1997           1998           1997
                                                         ------------  ------------   ------------   ------------
<S>                                                        <C>          <C>             <C>            <C>
(DOLLARS IN THOUSANDS)
Interest income on loans, net                              $  7,947     $  9,260        $ 20,979       $ 26,391
Interest income on short-term investments
  and other cash accounts                                     2,538        3,267           8,485          8,438
Recognition of present value discount                        12,885        9,699          36,493         27,110
Provision for credit losses on loans held for sale             (695)      (1,047)         (2,364)        (1,881)
                                                         ------------  ------------   ------------   ------------
  Net interest margin                                      $ 22,675     $ 21,179        $ 63,593       $ 60,058
                                                         ------------  ------------   ------------   ------------
                                                         ------------  ------------   ------------   ------------
</TABLE>

      Net interest margin increased 7% and 6% during the three and nine 
months ended September 30, 1998, respectively, compared with the same periods 
in 1997. The increase in net interest margin during the three and nine months 
ended September 30, 1998, compared with the same periods in 1997, is 
primarily due to an increase in the recognition of present value discount 
reflecting the growth in the Company's finance income receivable and related 
present value discount applied to the estimate of future cash flows. The 
decrease in interest earned on loans during the three and nine months period 
ended September 30, 1998 compared with the same periods of 1997 is primarily 
due to a reduction in loan purchasing volume.

      A decline in loan purchasing volume (see table below) of approximately 
25% and the timing of securitization transactions during the three and nine 
months ended September 30, 1998, respectively, resulted in a reduction in the 
average monthly balance of loans held for sale, on which the Company earns 
interest income until such loans are securitized, to $210.3 million and 
$189.5 million, respectively, down from $258.1 million and $254.4 million in 
the same periods of 1997, respectively. The decline in purchasing volume is 
primarily due to the Company's emphasis on more selective loan purchases and 
the time needed to market the Company's refined purchasing focus to its 
dealer base. The impact of the lower average balance of loans held for sale 
on interest income was partially offset by a rise in net interest rate 
spreads. During the three and nine months ended September 30, 1998, the 
weighted average net interest rate spread rose to 11.02% and 11.16% 
respectively, compared with 10.43% and 10.08%, respectively, during the same 
periods in 1997. The rise in net interest rate spread earned on loans held 
for sale is principally due to higher average annual percentage rates 
("APRs") on loans purchased during 1998 primarily resulting from a greater 
proportion of loan volume consisting of higher rate Classic loans.

      The Company's loan purchasing and securitization volume for each of the 
three and nine months ended September 30 are set forth in the table below.

<TABLE>
<CAPTION>

                                                          THREE MONTHS ENDED                     NINE MONTHS ENDED
                                                            SEPTEMBER 30,                          SEPTEMBER 30,
                                                 ----------------------------------      ----------------------------------
                                                       1998               1997                1998                1997
                                                 ---------------    ---------------      --------------     ---------------
<S>                                                 <C>                <C>                <C>                 <C>
(DOLLARS IN THOUSANDS)
Premier                                             $ 177,068          $ 326,087          $   510,906         $ 1,087,825
Classic                                               392,953            434,230            1,215,968           1,192,865
                                                 ---------------    ---------------      --------------     ---------------
  Total loans purchased                             $ 570,021          $ 760,317          $ 1,726,874         $ 2,280,690
                                                 ---------------    ---------------      --------------     ---------------
                                                 ---------------    ---------------      --------------     ---------------
Automobile loans securitized                        $ 554,734          $ 754,200          $ 1,714,710         $ 2,276,335

</TABLE>


                                       14

<PAGE>

      GAIN ON SALE OF LOANS. During the three months ended September 30, 1998,
gain on sale of loans declined 16% compared to the same period in 1997. During
the nine months ended September 30, 1998 and 1997, the Company recognized
non-recurring pre-tax charges to gain on sale of loans of $114.5 million and
$98.0 million, respectively, resulting in year to date losses on the sale of
loans of $39.6 million and $36.2 million, respectively. See "CHANGES IN
ACCOUNTING ESTIMATES AND NON-RECURRING CHARGES" for additional discussion.
Securitization volume decreased 26% and 25% during the three and nine months
ended September 30, 1998, respectively, compared with the same periods of 1997
due to lower origination growth. The impact of lower securitization volume on
revenues from gain on sale of loans was minimized during 1998, however, by the
widening of the gross interest rate spread earned. The following table
summarizes the Company's gross interest rate spreads for each of the three and
nine month periods ended September 30, 1998:

<TABLE>
<CAPTION>

                                               THREE MONTHS ENDED              NINE MONTHS ENDED
                                                 SEPTEMBER 30,                   SEPTEMBER 30,
                                           ---------------------------     --------------------------
                                             1998              1997           1998            1997
                                           ---------        ----------     ----------      ----------
<S>                                          <C>               <C>            <C>             <C>
Weighted average APR of loans securitized    16.81   %         16.25   %      16.97   %       15.85   %
Weighted average securitization rate          5.64              6.37           5.87            6.46
                                           ---------        ----------     ----------      ----------
       Gross interest rate spread (1)        11.17   %          9.88   %      11.10   %        9.39   %
                                           ---------        ----------     ----------      ----------
                                           ---------        ----------     ----------      ----------

</TABLE>

-----------
(1)   Before gains/losses on hedging transactions.

      The rise in gross interest rate spread during the three and nine months 
ended September 30, 1998 is primarily due to an increased proportion of loan 
volume consisting of higher rate Classic loans and general rate increases on 
the Company's Premier loans resulting from the Company's continued 
refinements to its risk-based pricing strategy. Gross interest rate spreads 
further benefited from a reduction in the securitization rate reflecting a 
general decline in U.S. Treasury rates compared to the same periods of 1997. 
During the third quarter of 1998, however, uncertainties in the bond market 
caused investors in asset-backed securities to demand higher interest rates. 
As a result, the spread over the two-year U.S. Treasury at which the Company 
sells its loans increased by approximately 50 basis points compared to its 
securitization transactions during 1997 and the first two quarters of 1998, 
partially off-setting the favorable movement in the U.S. Treasury market and 
its positive impact on the Company's gross interest rate spread.

      Any unamortized balance of participations paid to dealers is expensed 
at the time the related loans are securitized and recorded as a reduction to 
gain on sale. Due to the increased proportion of Classic loan purchases, 
which generally require lower participation rates than Premier loans, 
participations paid as a percentage of the principal balance of loans 
purchased declined to 2.94% and 2.87% during the three and nine months ended 
September 30, 1998, from 3.08% and 3.16%, respectively, in the same periods a 
year ago.

      The Company employs hedging strategies, including the use of derivative 
financial instruments to manage the gross interest rate spread on 
securitization transactions. The Company's securitization rate is indexed to 
rates on U.S. Treasury Notes with maturities similar to the average 
maturities of the assets being sold. To lock in the indexed rate for a 
specific anticipated securitization transaction and protect against changes 
in the treasury rate, the Company uses Forward U.S. Treasury Rate Lock 
agreements that most closely parallel the average life of its loans held for 
sale. Such hedging strategy includes certain risks created by the cash versus 
non-cash relationship of the hedging instrument and the related 
securitization. This relationship arises because the gain or loss realized 
from Forward U.S. Treasury Rate Lock agreements is settled with current cash 
payments and is subsequently recovered over time through a higher or lower 
gross interest rate spread at the time of securitization. During the three 
and nine months ended September 30, 1998, the Company had net realized losses 
on hedging transactions of $8.4 million and $16.8 million, respectively, 
compared with $4.0 million and $4.3 million, respectively, in the same 
periods of 1997. These hedging losses have been charged against gain on sale 
of loans. The increase in realized hedging losses during 1998 is primarily 
due to significant downward movement of treasury rates during the third 
quarter of 1998.


                                       15

<PAGE>

      SERVICING FEE INCOME.  The components of servicing fee income for each 
of the three and nine months ended September 30 were:

<TABLE>
<CAPTION>

                                            THREE MONTHS ENDED               NINE MONTHS ENDED
                                               SEPTEMBER 30,                   SEPTEMBER 30,
                                     ------------------------------   -------------------------------
                                                        (RESTATED)                        (RESTATED)
                                         1998              1997           1998               1997
                                     ------------      ------------   ------------       ------------
<S>                                     <C>               <C>            <C>               <C>
(DOLLARS IN THOUSANDS)
Contractual servicing fee income        $14,577           $12,154        $42,756           $32,679
Other servicing income                    6,659             5,594         18,330            15,082
                                     ------------      ------------   ------------       ------------
  Total servicing fee income            $21,236           $17,748        $61,086           $47,761
                                     ------------      ------------   ------------       ------------
                                     ------------      ------------   ------------       ------------

</TABLE>

      The Company earns contractual servicing fee income for servicing loans 
sold to investors through securitizations. The servicing fee is 1% per annum 
of the outstanding principal balance of the loans for all securitizations 
entered into prior to September 1997 and 1.25% per annum on loans included in 
and subsequent to the third quarter 1997 securitization. The growth in 
contractual servicing fee income is directly related to an increase in the 
average servicing portfolio outstanding and the increase in the contractual 
servicing rate in September 1997.

      Other servicing income consists primarily of collection fees, such as 
late payment fees and insufficient fund charges, and interest on collection 
accounts earned by the Company as servicer of the loans. The rise in other 
servicing income is principally due to increases in income from late fees and 
insufficient fund charges reflecting the increase in delinquency rates and 
growth in the Company's servicing portfolio compared to the same periods a 
year ago and increased collection account interest attributable to the growth 
in the average servicing portfolio outstanding.

      The following table reflects the growth in the Company's servicing 
portfolio from September 30, 1997 to September 30, 1998:

<TABLE>
<CAPTION>

                                                                           AT SEPTEMBER 30,
                                                                  ----------------------------------
                                                                       1998                1997
                                                                  --------------      --------------
     <S>                                                            <C>                 <C>
     (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
     Principal balance of automobile loans held for sale            $    20,785         $    57,023
     Principal balance of loans serviced under securitizations        5,117,013           4,767,605
                                                                  --------------      --------------
     Servicing portfolio                                            $ 5,137,798         $ 4,824,628
                                                                  --------------      --------------
                                                                  --------------      --------------
     Average unpaid principal balance (actual dollars)              $    11,480         $    12,248
     Number of loans serviced                                           447,542             393,926

</TABLE>

      The principal balance of the Company's servicing portfolio increased 6% 
from September 30, 1997 to September 30, 1998. This increase reflects loan 
purchases and subsequent securitizations, partially offset by defaults, 
prepayments and scheduled repayments. The decline in average outstanding 
balance of loans during the first nine months of 1998 reflects an increase in 
the proportion of used to new cars financed by the Company and a reduction in 
loan-to-value ratios on loan purchases resulting from the Company's more 
selective buying practices.

      The Company's servicing fee approximates adequate compensation as 
defined by SFAS 125 and therefore, the Company has not recorded a servicing 
asset or liability at September 30, 1998.

      OPERATING EXPENSES. During the three months ended September 30, 1998, 
salaries and benefits decreased approximately 4% from the same period in 
1997. This reduction is primarily due to a decrease in the average number of 
employees to 1,417 during the third quarter of 1998 compared with 1,545 
during the same period of 1997 resulting primarily from efforts to centralize 
the Company's collection operations. Beginning in the first quarter of 1998, 
the Company began to move collection personnel out of buying centers into 
centralized sites to better


                                       16

<PAGE>

leverage collections resources and technology and to control collection 
processes more tightly. The 6% increase in salaries and benefits during the 
first nine months of 1998 is primarily due to increased overtime compensation 
incurred during the first and second quarter of 1998 migration to the 
centralized collection sites.

      Other operating costs, including administrative, occupancy, 
depreciation and amortization, origination, servicing and collection 
expenses, increased 13% and 28% for the three and nine months ended September 
30, 1998, respectively, compared with the same periods in 1997. Included in 
operating costs during the nine months ended September 30, 1998 is a pre-tax 
charge of approximately $10.5 million. This charge is related to the 
elimination of the Company's retail remarketing program and other 
organizational changes designed to improve operating efficiency. See "CHANGES 
IN ACCOUNTING ESTIMATES AND NON-RECURRING CHARGES." Included in operating 
costs during the first nine months of 1997 was a pre-tax charge of 
approximately $5.0 million primarily related to legal costs and severance 
expenses for certain former executives of the Company. Excluding these 
charges, other operating costs increased 22% for the nine months ended 
September 30, 1998, compared with the same period in 1997. The increase in 
other operating costs during the three and nine months periods is primarily a 
result of the higher percentage of Classic program loans in the portfolio, 
since these loans generally require greater collection efforts and related 
costs (including increased telephone, fax, postage and repossession expenses) 
than Premier program loans.

      LONG-TERM DEBT AND OTHER INTEREST EXPENSE. Long-term debt and other 
interest expense increased 24% and 35% for the three and nine months ended 
September 30, 1998, respectively, compared to the same periods in 1997. The 
increases are primarily due to the issuance of $300.0 million and $75.0 
million of 11.5% Senior Notes due 2007 (the "Senior Notes") in March 1997 and 
October 1997, respectively, partially offset by the concurrent extinguishment 
of $145.0 million of the 13% Notes in March 1997.

      INCOME TAXES. The Company did not incur an income tax provision during 
the three months ended September 30, 1998, due to the utilization of net 
operating loss carryforwards resulting from the non-recurring non-cash charge 
during the second quarter of 1998. See "CHANGES IN ACCOUNTING ESTIMATES AND 
NON-RECURRING CHARGES" for additional discussion.

      EXTRAORDINARY ITEM. In March 1997, the Company issued $300.0 million of 
its Senior Notes and utilized approximately $173.5 million of the proceeds to 
repurchase and covenant defease the Company's $145.0 million of 13% Notes, 
including accrued interest of $7.9 million and a premium of approximately 
$20.3 million. These charges and additional professional fees incurred to 
retire such debt were treated as an extraordinary item, net of tax.

      FINANCIAL CONDITION

      FINANCE INCOME RECEIVABLE. Finance income receivable decreased to 
$593.0 million at September 30, 1998 from $602.5 million at December 31, 
1997. This 2% decrease reflects a non-recurring $114.5 million pre-tax charge 
during the second quarter of 1998 (see "CHANGES IN ACCOUNTING ESTIMATES AND 
NON-RECURRING CHARGES") partially offset by amounts capitalized upon 
completion of the Company's securitization transactions related to the 
present value of estimated cash flows.

      DEFERRED INCOME TAX. There were no deferred income taxes at September 
30, 1998 compared with a net deferred tax liability of $11.5 million at 
December 31, 1997. This decrease reflects the recognition of a portion of the 
tax benefit from the 1998 second quarter loss from operations. In accordance 
with SFAS No. 109, "Accounting for Income Taxes," the Company established a 
valuation allowance during the quarter ended June 30, 1998. The valuation 
allowance was established to offset the deferred tax asset associated with 
the Company's net operating loss carryforward resulting in no net deferred 
income taxes at September 30, 1998.

      IMPACT OF YEAR 2000

      The Company recognizes that the arrival of the Year 2000 poses a unique 
worldwide challenge to the ability of all computer based applications to 
recognize the date change from December 31, 1999 to January 1, 2000, 
potentially causing miscalculations, system failures and other operational 
problems.


                                       17

<PAGE>

      One of the Company's most critical operating systems is its loan 
accounting system. In July 1997, an internal implementation team along with 
outside consultants was assigned to evaluate, select, and implement a new 
installment loan accounting system and various sub-systems (the "ILA system") 
in connection with an initiative to replace and enhance the Company's key 
operating systems. One of the requirements for consideration was that the new 
ILA system be Year 2000 compliant. In late 1997, a contract was signed with a 
nationally recognized vendor to provide the Company with such a system. The 
contract warrants, among other things, that the core software system being 
purchased would be fully Year 2000 compliant by mid 1998. The contract 
further warrants that the software will be installed and in parallel testing 
with the Company's current system in the first quarter of 1999. To date, the 
terms of the contract have been met.

      In addition, in early 1998 the Company formed a dedicated project team 
to conduct an extensive analysis of the impact that the Year 2000 issue would 
have on its automated information systems (exclusive of the ILA system), 
business support systems and facility operating systems. The project team has 
been responsible for the prioritization of Year 2000 tasks, development of 
implementation plans, and the establishment of timetables for completion and 
testing of all necessary modifications. As a result, the Company has 
initiated the replacement, modification or reprogramming of Year 2000 
non-compliant hardware and software and since 1997 has required that all new 
hardware and software be certified as Year 2000 compliant prior to purchase. 
To assist in this process, the Company has engaged an independent company to 
aid in the remediation of non-compliant programs. The modification and 
reprogramming of these programs is currently underway and scheduled to be 
completed and tested by the end of 1998 with implementation completed during 
the first quarter of 1999. All Year 2000 testing will be completed in an 
isolated systems environment dedicated for Year 2000 issues. As a contingency 
to the possibility of an unplanned delay in the implementation of the new ILA 
system discussed above, the Company's current loan accounting system has been 
included in the programs provided to the independent company for remediation. 
This will provide a Year 2000 compliant installment loan accounting system 
even if the implementation of the new ILA system should be delayed beyond the 
end of 1999.

      The Company currently expects to have all business critical hardware 
and software Year 2000 compliant by the end of the first quarter of 1999 and 
to complete a Year 2000 certification process by mid-1999. The Company 
estimates that the cost of its Year 2000 project will aggregate approximately 
$1.5 million, of which approximately $0.3 million has been expended through 
September 30, 1998. These costs do not include amounts related to the 
implementation of the ILA system or other hardware and software purchases 
which the Company had planned to acquire and which are not directly related 
to, or the purchase of which has not been accelerated because of, the Year 
2000 issue. Consistent with the Company's capitalization policy, the cost of 
such non-Year 2000 hardware and software purchases will be capitalized and 
amortized over their expected useful lives.

      Ultimately, the potential impact of the Year 2000 issue will depend not 
only on the success of the corrective measures that the Company undertakes, 
but also on the way in which the Year 2000 issue is addressed by its business 
partners, service providers, utility providers, governmental agencies and 
other entities with which the Company does business. The Company is 
developing a plan to contact parties which provide services critical to the 
successful operation of its business to heighten their awareness of the Year 
2000 issue, to learn how they are addressing it and to evaluate any likely 
impact on the Company. For example, the Company plans to begin a Year 2000 
survey of its credit bureaus, investment bankers and warehouse providers 
during the fourth quarter of 1998. The Year 2000 efforts of third parties are 
not within the Company's control, however, and their failure to remediate 
Year 2000 issues successfully could result in business disruption, increased 
operating costs and increased credit risk for the Company. At the current 
time, it is not possible to determine whether any such events are likely to 
occur, or to quantify any potential negative impact they may have on the 
Company's future results of operations and financial condition.

      The Company believes that it has an effective plan in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary processes of its Year 2000 plan. In the event that the
Company does not complete any additional phases of its plan, the Company may be
unable to perform its key operating activities such as the purchase of loans and
the invoicing, collecting and application of obligor repayments. In addition,
disruptions in the economy generally resulting for Year 2000 issues could also
materially adversely affect the Company. The Company could be subject to
litigation for computer systems failure,


                                       18

<PAGE>

such as improper application of repayments and resulting incorrect credit 
reporting to credit bureaus. The amount of potential liability and lost 
revenue cannot reasonably be estimated at this time. The Company currently 
has no contingency plans in place in the event it does not complete all 
phases of its Year 2000 program. The Company plans to continuously monitor 
the status of completion of its Year 2000 plan and, based on such 
information, will develop contingency plans as necessary.

      The foregoing discussion regarding Year 2000, including the discussion 
of the timing and effectiveness of implementation and cost of the Company's 
Year 2000 project, contains forward-looking statements, which are based on 
management's best estimates derived using various assumptions. These 
forward-looking statements involve inherent risks and uncertainties, and 
actual results could differ materially from those contemplated by such 
statements. Factors that might cause material difference include, but are not 
limited to, the continued availability of key Year 2000 personnel, the 
Company's ability to locate and correct all relevant computer codes, the 
performance of contractors and companies retained to provide new software and 
to remediate existing hardware and software, and the Company's ability to 
respond to unforeseen Year 2000 complications. Such material differences 
could result in, among other things, business disruption, operational 
problems, financial loss, legal liability and similar risks.

DELINQUENCY, CREDIT LOSS AND REPOSSESSION EXPERIENCE

      The following tables describe the Company's delinquency, credit loss 
and repossession experience for the periods indicated. A delinquent loan may 
result in the repossession and foreclosure of the collateral for the loan. 
Losses resulting from repossession and foreclosure of the collateral are 
charged against applicable allowances.

<TABLE>
<CAPTION>

DELINQUENCY EXPERIENCE (1):
                                                  SEPTEMBER 30, 1998                      DECEMBER 31, 1997
                                           ----------------------------------    ----------------------------------
                                              NUMBER OF                             NUMBER OF
                                                LOANS            BALANCE              LOANS            BALANCE
                                           -------------     -------------       -------------     -------------
<S>                                           <C>              <C>                  <C>              <C>
(DOLLARS IN THOUSANDS)
Servicing portfolio at end of period            447,542        $5,137,798             411,429        $4,956,090
Delinquencies:
 31-60 days                                       9,820        $  114,398               8,297        $  100,161
 61-90 days                                       3,662            43,666               3,635            45,485
 91 days or more                                  4,363            51,440               3,019            34,047
                                           -------------     -------------       -------------     -------------
Total loans delinquent 31 or more days           17,845        $  209,504              14,951        $  179,693
                                           -------------     -------------       -------------     -------------
                                           -------------     -------------       -------------     -------------
Delinquencies as a percentage of
 number of loans and amount
 outstanding at end of period (2)                  3.99%             4.08%               3.63%             3.63%

Amount in repossession                            5,912        $   35,739               6,083        $   55,300

</TABLE>

(1) All amounts and percentages are based on the principal amount scheduled to
    be paid on each loan. The information in the table includes previously sold
    loans which the Company continues to service.

(2) Amounts shown do not include loans which are less than 31 days delinquent.


                                       19

<PAGE>

<TABLE>
<CAPTION>

CREDIT LOSS/REPOSSESSION EXPERIENCE (1): 
                                                                      THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                                        SEPTEMBER 30,                         SEPTEMBER 30,
                                                             ------------------------------------    ------------------------------
                                                                   1998                1997               1998              1997
                                                             --------------     ---------------      ------------     -------------
<S>                                                            <C>                 <C>               <C>               <C>
(DOLLARS IN THOUSANDS)
Average servicing portfolio outstanding during the period      $5,133,325          $4,661,818        $5,062,745        $4,318,830

Average number of loans outstanding during the period             444,285             379,681           431,694           349,480
Number of charge-offs                                               9,125               6,843            25,399            17,208

Gross charge-offs (2)                                          $   60,896          $   38,681        $  192,322        $  118,352
Recoveries (3)                                                      5,841               2,468            13,589             6,881
                                                             --------------     ---------------      ------------     -------------
Net losses                                                     $   55,055          $   36,213        $  178,733        $  111,471
                                                             --------------     ---------------      ------------     -------------
                                                             --------------     ---------------      ------------     -------------

Annualized gross charge-offs as a percentage of average
 servicing portfolio                                                 4.75 %              3.32 %            5.07 %            3.65 %
Annualized net losses as a percentage of average
 servicing portfolio                                                 4.29 %              3.11 %            4.71 %            3.44 %

</TABLE>

-------------------
(1) All amounts and percentages are based on the principal amount scheduled to
    be paid on each loan. The information in the table includes previously sold
    loans which the Company continues to service.

(2) Gross charge-offs represent principal amounts which management estimated to
    be uncollectable after the consideration of anticipated proceeds from the
    disposition of repossessed assets and selling expenses.

(3) Includes post-disposition collection amounts received on previously
    charged-off loans.


      The increase in delinquency rate at September 30, 1998, compared with 
December 31, 1997, reflects the continued rise in the proportion of Classic 
loans in the Company's servicing portfolio, which approximated 53% of loans 
serviced at September 30, 1998, compared with 43% at December 31, 1997. 
Repossessed inventory has decreased since December 31, 1997, primarily due to 
the Company's decision to increase its use of wholesale disposition channels 
to liquidate repossessed vehicles thereby shortening the average number of 
days a vehicle is in inventory. During the first nine months of 1998 the 
Company sold approximately 77% of its repossessed inventory through wholesale 
channels compared with 48% in the same period a year ago, resulting in a 
reduction in the average number of days vehicles are held in inventory to 
approximately 64 days at September 30, 1998 compared with 105 days at 
December 31, 1997.

      The increase in gross charge-offs and net losses during the three and 
nine months ended September 30, 1998, compared to the same periods a year ago 
primarily reflects the continued rise in the proportion of Classic loans in 
the Company's servicing portfolio and the increase in the utilization of 
wholesale disposition channels. As previously discussed, the Company 
announced that it is planning to discontinue the sale of repossessed vehicles 
through retail disposition channels and anticipates that it will be 
completely out of these operations by the end of 1998 (see "Changes in 
Accounting Estimates and Non-Recurring Charges"). The Company believes that 
its decision to discontinue its retail remarketing operations will enable it 
to better manage its level of repossessed inventory and improve the timing of 
excess cash flows released to the Company from securitization trusts as a 
result of an increase in the speed at which repossessed vehicles can be 
liquidated. Annualized gross charge-offs and net losses during the nine month 
period ended September 30, 1998, include a charge of 0.57%, representing the 
impact of a write-down of current inventory resulting from a revision to the 
estimate of net realizable value (see "Changes in Accounting Estimates and 
Non-Recurring Charges") and an additional provision primarily associated with 
loans originated in connection with retail dispositions.


                                       20

<PAGE>

LIQUIDITY

      The Company's business requires substantial cash to support its 
operating activities. The principal cash requirements include (i) amounts 
necessary to purchase and finance automobile loans pending securitization, 
(ii) payment of dealer participations, (iii) cash held from time to time in 
restricted spread accounts to support securitizations and warehouse 
facilities and other securitization expenses, (iv) interest advances to 
securitization trusts, (v) repossessed inventory, and (vi) interest expense. 
The Company also uses significant amounts of cash for operating expenses. The 
Company receives cash principally from interest on loans held pending 
securitization, from excess cash flow received from securitization trusts and 
from fees earned through servicing of loans held by such trusts. The Company 
has operated on a negative operating cash flow basis and expects to continue 
to do so in the near future. The Company has historically funded these 
negative operating cash flows principally through borrowings from financial 
institutions, sales of equity securities and sales of senior and subordinated 
notes. The Company may require additional capital in the future to fund 
continued negative cash flows, although there can be no assurance that the 
Company will have access to capital markets in the future or that financing 
will be available to satisfy the Company's operating and debt service 
requirements or to fund its future growth. See "Capital Resources."

      PRINCIPAL USES OF CASH IN OPERATING ACTIVITIES

      PURCHASE AND FINANCING OF AUTOMOBILE LOANS. Automobile loan purchases 
represent the Company's most significant cash flow requirement. The Company 
purchased $1.7 billion of loans during the first nine months of 1998 compared 
to $2.3 billion during the same period in 1997. The Company funds the 
purchase of loans primarily through the use of warehouse facilities prior to 
securitization of such assets. However, because the warehouse facilities are 
subject to advance rate restrictions and do not advance 100% of the loan 
balances being purchased, the Company is required to fund the remainder of 
all purchases with other available cash resources prior to securitization.

      DEALER PARTICIPATIONS. Consistent with industry practice, the Company 
pays dealers participations for selling loans to the Company. These 
participations typically require the Company to advance an up-front amount to 
dealers. Participations paid by the Company to dealers during the nine months 
ended September 30, 1998 were $49.5 million, or approximately 2.87% of the 
principal balance of loans purchased, compared with $72.1 million, or 
approximately 3.16% of loans purchased, during the same period in 1997. The 
decrease in dealer participations as an aggregate amount and as a percentage 
of loans purchased reflects the growth in volume in Classic loans, which are 
generally associated with lower dealer participations.

      SECURITIZATION OF AUTOMOBILE LOANS. In connection with securitizations, 
the Company is required to fund spread accounts related to each transaction. 
The Company funds these spread accounts by foregoing receipt of excess cash 
flow from the relevant securitization trust until these spread accounts 
exceed predetermined levels. In addition, for certain securitizations prior 
to the third quarter of 1997, the Company has been required to provide 
initial cash deposits into the spread accounts. The Company had $252.9 
million of restricted cash in spread accounts at September 30, 1998, compared 
with $250.3 million at December 31, 1997. The increase in restricted cash in 
spread accounts reflects the Company's continued securitization of loan 
purchases and the related accumulation of excess cash flows to levels defined 
within each securitization agreement, partially offset by the release of 
excess cash flows. Restricted cash in spread accounts was further reduced by 
$25.0 million during the second quarter of 1998 under an agreement between 
the Company and its provider of asset-backed securities insurance which 
allowed the Company to receive an early release from the spread accounts. See 
"Liquidity - Other Capital Resources" for additional discussion.

      The Company also incurs certain expenses in connection with 
securitizations, including underwriting fees, credit enhancement fees, 
trustee fees and other costs, which approximate 0.5% of the principal amount 
of the asset-backed securities sold in the securitizations.


                                       21

<PAGE>

      ADVANCES DUE TO SERVICER. As the servicer of loans sold in
securitizations, the Company periodically makes interest advances to the
securitization trusts to provide for temporary delays in the receipt of required
interest payments from borrowers. In accordance with the relevant servicing
agreements, the Company makes advances only in the event it expects to recover
such advances through payments from the obligor over the life of the loan.

      REPOSSESSED INVENTORY. At September 30, 1998, repossessed inventory 
managed or owned by the Company and held for resale was $35.7 million, 
compared with $55.3 million at December 31, 1997. The rate of repossessed 
inventory turnover impacts cash available for spread accounts under 
securitization trusts and, consequently, the excess cash available for 
distribution to the Company. At September 30, 1998, repossessed inventory was 
0.7% of the total servicing portfolio compared with 1.1% at December 31, 
1997. In June 1998, the Company decided to discontinue liquidating its 
repossession inventory through retail disposition channels and began 
disposing of its repossessed vehicles exclusively through wholesale auctions 
(see "CHANGES IN ACCOUNTING ESTIMATES AND NON-RECURRING CHARGES"). Any 
improvement in excess cash flows due to an increase in the inventory turnover 
rate may be partially reduced by lower recoveries realized through the 
exclusive use of wholesale auctions and generally lower wholesale used car 
prices.

      INTEREST EXPENSE. Although the Company records net interest margin as 
earned, a significant portion of the interest income component is generally 
received in cash from excess cash flow, while the interest expense component 
(primarily warehousing interest) is paid prior to securitization. The Company 
also incurs interest expense related to both short-term and long-term debt 
obligations.

      PRINCIPAL SOURCES OF CASH IN OPERATING ACTIVITIES

       EXCESS CASH FLOW. The Company receives excess cash flow from 
securitization trusts, including the realization of gain on sale, the 
recovery of dealer participations, and the recovery of accrued interest 
receivable earned, but not yet collected, on loans held for sale prior to 
securitization. Recovery of dealer participations and accrued interest 
receivable, which occur throughout the life of the securitization, result in 
a reduction of the finance income receivable but, because they have been 
considered in the original determination of the gain on sale of loans, have 
no effect on the Company's results of operations in the year in which the 
participations and interest are recovered from the securitization trust. 
During the first nine months of 1998, the Company received $103.6 million of 
excess cash flow (which amount does not include the $25 million released 
sooner than would otherwise have been the case pursuant to an arrangement 
with the Company's providers of asset-backed securities performance see 
"Capital Resources - Other Capital Resources"), compared with $59.0 million 
during the same nine months in 1997. Included in the 1998 cash released from 
spread accounts is $0.6 million of cash which is restricted pursuant to an 
arrangement between the Company and its asset-backed securities insurance 
provider.

      SERVICING FEES. The Company receives servicing fees for servicing 
securitized loans included in various securitization trusts. The servicing 
fee for loans in securitization trusts is equal to one percent per annum of 
the outstanding principal balance of the loans for all securitizations 
entered into prior to September 1997 and 1.25 percent per annum on loans 
subsequently securitized. The Company also receives collection fees, such as 
late payment fees and insufficient fund charges, and interest on collection 
accounts earned by the Company as servicer of the loans. During the nine 
months ended September 30, 1998 and 1997, the Company received cash for such 
servicing in the amount of $61.1 million and $47.5 million, respectively. 
Servicing fee income is reflected in the Company's revenues as earned.

CAPITAL RESOURCES

      The Company finances the acquisition of automobile loans primarily 
through (i) warehouse facilities, pursuant to which loans are sold or 
financed generally on a temporary basis, and (ii) the securitization of 
loans, pursuant to which loans are sold as asset-backed securities. 
Additional financing is required to fund the Company's operations.


                                       22

<PAGE>

      WAREHOUSE FACILITIES. Automobile loans held for sale are funded 
primarily through warehouse facilities. At September 30, 1998, the Company 
had three warehouse facilities in place with various financial institutions 
and institutional lenders with an aggregate capacity of $700.0 million, of 
which $642.2 million was available. The Company's current warehouse 
facilities have expiration dates between July 1999 and October 1999, subject 
to renewal or extension at the lenders' option. Proceeds from 
securitizations, generally received within seven to ten days following the 
cut-off date established for the securitization transaction, are applied to 
repay amounts outstanding under warehouse facilities.

      SECURITIZATION PROGRAM. An important capital resource for the Company 
has been its ability to sell automobile loans in the secondary markets 
through securitizations. The following table summarizes the Company's 
securitization transactions for the nine months ended September 30, 1998,
all of which were publicly issued and rated "AAA/Aaa".

<TABLE>
<CAPTION>

                                                                 REMAINING                                          CURRENT
                                             REMAINING          BALANCE AS A      CURRENT          WEIGHTED          GROSS
                                           BALANCE AS OF        PERCENTAGE        WEIGHTED         AVERAGE          INTEREST
                             ORIGINAL       SEPTEMBER 30,       OF ORIGINAL       AVERAGE       SECURITIZATION        RATE
Date                          BALANCE           1998              BALANCE           APR              RATE            SPREAD
-------------------------  ------------  ------------------  -----------------  ------------  ------------------  ------------
<S>                         <C>            <C>                  <C>               <C>           <C>                 <C>
(DOLLARS IN THOUSANDS)
March 1998                  $   525,000         $   455,230          86.71%         17.15%            5.93%           11.22%
June 1998                       550,000             514,691          93.58%         17.16%            5.97%           11.19%
September 1998 (1)              600,000             536,722          89.45%         16.82%            5.63%           11.19%
                           ------------  ------------------
                            $ 1,675,000         $ 1,506,643
                           ------------  ------------------
                           ------------  ------------------
</TABLE>

---------------------
 (1) As of September 30, 1998, the Company had delivered $541.4 million of
automobile loans and $58.6 million of cash remained in the pre-funded portion of
the trust.


      HEDGING STRATEGY

      The Company enters into hedging transactions to manage its gross 
interest rate spread on loans held for sale. The Company sells Forward U.S. 
Treasury Locks that most closely parallel the average life of its portfolio 
of loans held for sale. Hedging gains and losses are recognized as a 
component of the gain on sale of loans on the date such loans are sold. To 
the extent hedging gains or losses are significant, the resulting up-front 
cash payments or receipts may impact the Company's liquidity. The Company 
receives the up-front gains or losses back over time through a lower or 
higher spread, respectively, at the time of securitization. During the first 
nine months of 1998, the Company had net realized losses on hedging 
transactions of $16.8 million. The Company had unrealized losses on hedge 
contracts of $4.7 million that remained outstanding at September 30, 1998.

      OTHER CAPITAL RESOURCES

      Historically, the Company has utilized various debt and equity 
financings to offset negative operating cash flows and support its operations.

      The Company has a program to sell up to $100.0 million of unsecured 
subordinated notes (the "Junior Subordinated Notes") to be offered to the 
public from time to time (the "Note Program"). Issuance of Junior 
Subordinated Notes under the Note Program is subject to restrictions under 
the Company's Senior Note indenture. The Note Program includes Junior 
Subordinated Notes extendible by the investor having maturities of 90 and 180 
days and one year after the date of issue and fixed-term Junior Subordinated 
Notes having maturities of one, two, three, four, five and 10 years after the 
date of issue. Interest rates on any unsold Junior Subordinated Notes are 
subject to change by the Company from time to time based on market 
conditions. Interest rates on extendible Junior Subordinated Notes may be 
adjusted at any roll-over date. During the first nine months of 1998, the 
Company issued $6.2 million of Junior Subordinated Notes.


                                       23

<PAGE>

      In May 1998, the Company and its provider of asset-backed securities 
insurance entered into an arrangement whereby the Company was allowed to 
receive $25 million of cash from certain spread accounts sooner than it would 
have absent such arrangement. The arrangement may be extended on an annual 
basis upon mutual arrangement by and between the Company and its provider of 
asset-backed securities insurance. The Company pays a monthly fee to its 
provider of asset-backed securities insurance to maintain the arrangement. 
The $25 million will be replenished in relevant spread accounts by means of a 
$3 million reduction in the level of monthly cash releases from the spread 
accounts beginning in May 1999, unless the terms of the arrangement are 
extended.


                                       24

<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the Registrant has duly caused this amendment to its 
Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, 
thereunto duly authorized.



                             ARCADIA FINANCIAL LTD.


<TABLE>
<CAPTION>
<S> <C>

           SIGNATURE                              TITLE                                               DATE
           ---------                              -----                                               ----

   /s/ Richard A. Greenawalt       President, Chief Executive Officer, and                        March 23, 1999
-------------------------------    Director
     Richard A. Greenawalt

      /s/ John A. Witham           Executive Vice President and Chief Financial Officer           March 23, 1999
-------------------------------    (Principal Financial Officer)
       John A. Witham 

    /s/ Brian S. Anderson          Senior Vice President, Corporate Controller and                March 23, 1999
-------------------------------    Assistant Secretary (Principal Accounting Officer)
      Brian S. Anderson

</TABLE>


                                       25